June 2, 2020 - 7:00am
As Warren Buffett once said, “it’s only when the tide goes out that you can see who’s been swimming naked.”
In this deepest of crises, one might hope to see some deep truths laid bare — but what are they? Looking at our economy and society, what fundamental weakness do we see exposed?
In a highly interesting piece for The Guardian, Malcolm Bull points the finger at our obsession with efficiency — and in particular our aversion to slack:
Contingency planning requires unused capacity, whereas exploiting every opportunity to the full means losing the flexibility needed to respond to sudden changes of fortune…
Having large stocks of PPE, underemployed nurses, or a lot of spare capacity in ICUs, falls into the same category. Idle resources are what you need in a crisis, so some degree of inefficiency isn’t necessarily a bad idea.
- Malcolm Bull, The Guardian
Except that this is the just-in-time economy, in which unused capacity is a wasted resource, stock is clutter and redundancy a design fault. Anything that isn’t being used right now is the enemy — prey to an army of management consultants and lifestyle gurus.
Bull makes a compelling case against our culture of over-optimisation, but I wonder if it really is the defining error of the age.
Yes, we’ve been caught out on some key items — above all, the PPE needed by frontline workers. But, more generally, the just-in-time economy has come out of this looking pretty good. Supermarkets have moved fast to adapt to unprecedented shifts in supply and demand. Despite a locked-down global economy, they’ve managed to close the gaps on their shelves — and have kept people socially distanced in just about the only large indoor spaces where strangers still congregate. The fact that we’re getting fatter in lockdown is an extraordinary and under-appreciated achievement (theirs, not ours). It’s just a shame we didn’t put the supermarket bosses in charge of PPE and testing kits.
For all the talk of Al, gene therapy and other advances, the wonder of our age is logistical excellence.
There’s a strong argument that we’re in the midst of a “great stagnation” — that we’re no longer making technological breakthroughs like we did in the 19th and 20th centuries. But when it comes to managing the productive capacities that we do possess — it’s incredibly impressive. Just look at the speed with which extra hospital capacity was delivered (not that we’ve needed it so far).
We’ve become really, really good at matching supply to demand. So good in fact that we’re having to rethink some basic economic assumptions. For instance, we’ve had a whole decade of ultra-low interest rates and yet no sign of inflation — surely testament to our ability to deal with shortages fast.
If the pandemic has exposed a fundamental flaw in the economic system it is extreme mobility. The virus has only caused so much harm because the infrastructure of the globalised economy massively accelerated its spread across the world. Hyper-connectivity, not over-efficiency, is our fatal weakness.
Ah, but aren’t the two related — the former enabling the latter? Yes, but they don’t have to be. We don’t need millions of people in the air and crossing borders at any one time to keep most global trade going.
With some judicious re-shoring of strategically-significant supply chains, we can continue to exchange physical and virtual goods. But whether we can continue exchanging people on anything like the same scale as before is the most important of all the post-Covid questions.
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SubscribeI’m not sure about putting “the supermarket bosses in charge”. The supermarkets may “have moved fast” but what is obvious for all to see is that, during this crisis, prices in those supermarkets have risen sharply and discounting has ceased. Indeed, many supermarkets have for some time been drifting away from the self-service model that made them so successful. Paying staff to shop and drivers to deliver is not an efficient model for keeping prices low.
It is stated that: hyper-connectivity and over-efficiency don’t have to be related but that we’ll need “some judicious re-shoring of strategically-significant supply chains”; and that inflation has been kept low because we’ve been “really good at matching supply to demand”.
While re-shoring of strategically-significant supply chains sounds good in theory, and was a post-Brexit strategy for some, the reality is likely to be more complicated. In a fast moving technological world it is not easy to predict what will be strategically-significant. Low prices are also the result of economies of scale which may not be achieved by re-shoring. Britain is an island and hyper-connectivity is important to our survival as a competitive nation. We are currently highly dependent on ferries to get goods in and out of the country cheaply but those ferries are loss making without passengers. To get out of the mess we are in, we are going to need the hyper-connectivity and international trade more than ever to ensure gaps in supply chains are filled quickly and cheaply.
Looking ahead, there seems a real danger of stagflation and now does not seem a good time to be reducing connectivity and mobility.
‘… “have moved fast” but what is obvious for all to see is that, during this crisis, prices in those supermarkets have risen sharply and discounting has ceased.’
Basic market economics. That is how it should be.
Supply and demand. All resources are scarce, when supply falls or demand increases, increased price damps down demand and signals suppliers to produce more… profit incentive.
The alternative is Government rationing controls,.. and then a black market… or empty shelves.
I agree about supply and demand. The point I was trying to make, in a cack-handed way, is that prices are rising in supermarkets, and will be elsewhere, because of supply issues (they were also rising in some supermarkets before lockdown due to inefficiencies). Many companies are likely to become insolvent in coming months and that will create further supply problems across the economy. Lower demand will create spare capacity in some industries, leading to higher unit costs. VAT is likely to increase raising prices even higher. There is a real danger of stagflation and that now is not the time to be reducing hyper-connectivity and mobility.
Why is VAT likely to increase? Germany has just reduced theirs
Because the massive and increasing debt will have to be repaid at a time when Government income is falling. Revenue from income tax will fall because of fewer people in employment and corporation tax revenue will also fall because so many companies will incur losses arising from the crisis and those losses can be carried forward into future tax years. The Government is caught between a rock and a hard place. It can borrow but at some point it will have to cut expenditure and get improved revenue streams. Germany’s VAT reduction is just temporary until end of December, by which time, the economic situation is likely to be even worse. How bad will depend in part on the number of company insolvencies. Germany & France are supporting/investing in key companies to try to mitigate fall out but there are no easy answers. A VAT rise is a simple easy way to get revenue and more favoured by conservative elements than income or corporation tax increases. The next Budget will be interesting.
You say “Paying staff to shop and drivers to deliver is not an efficient model for keeping prices low.”
I disagree. Surely it is more efficient for 40 people to email their orders to the store, where one person (or robot) gathers up 40 (let’s say) tubes of toothpaste and puts them in 40 separate bags, then hands them off to one driver (or drone) to be delivered around the neighborhood, than for 40 customers to drive to the store, park in 40 separate parking spaces, walk 40 different ways around the store, pick up 40 tubes of toothpaste, queue for 40 separate checkouts, make 40 separate in-person payments, then walk to their 40 separate cars and drive home.
It is not efficient for the supermarket to be doing all the shopping & delivering, and I’m not aware of any supermarket in the UK that uses robots or drones. The delivery charge does not cover the true extra costs of this model which is why prices have been rising. Those that have stuck by the traditional supermarket model, such as Aldi & Lidl, have been able to keep their prices down and have gained increasing market share as a result.
Interesting and interesting comments below.
I’d like to propose an alternative reason why building up some measure of national resilience might be preferable over the hyper efficiencies of globalised neoliberalism which takes your point about reshoring strategic interests abit further. However I certainly take your point that hyper-connectivity of globalised transportation systems is a fundamental systemic since if labour, as a key factor of production, is immobilised due to the quick spreading of a virus for example, then economic output will be reduced proportionally.
However, if resilience can show itself to be beneficial beyond the greater capacity to deal with adverse circumstances such as globalised supply chains failing due to a yet more virulent strain of coronavirus immobilising a greater number of people, then perhaps switching to resilience over hyper efficiency might be considered worth it.
Therefore, what if resilience can stimulate economic growth as well as build up national systemic security.
Bearing in mind that neoliberalism (the trend towards hyper capital efficiencies via privatisation, market access and economies of scale) in conjunction with globalisation (the meta platform from which to facilitate neoliberalism) has resulted in far reaching reliance on the systemic security of systems abroad. Therefore as long as these foreign systems operate without disruption then our much needed import dependancies are broadly safe.
But perhaps another symptom of offshoring our national needs is the missed opportunity of broad ranging economic growth within our own national domestic markets by reshoring our manufacturing capacity.
From a resilience perspective, this means rather than rely on a few dominant global production lines that traverse the globe, production lines are recreated within the national economy but it also means building up economic capacity which means economic growth.
In essence therefore, building up national resilience also means building up economic capacity which would primarily produce for national needs so obviously would need protecting from more efficient economic output abroad.
So yes capital efficiencies are lost, yes profit margins are smaller and yes duplication will result in an increase in resource use and ecological degradation but one, this resilience approach provides the nation with the manufacturing capacity to produce our own goods. Two, it helps to maintain national prosperity whilst the human population is growing. Three, it provides protection against shocks and alleviates the need for hyper connectivity. Four, reshoring production capacity will create more meaningful and dignified jobs even if pay and profits are reduced due to the loss of efficiency and the likelihood of higher commodity prices due to increased competition over scarce resources. Lastly, if production capacity is reshored (or inshored) at national levels, then this capacity building will equate to national economic growth which may or may not need to be tax subsidised.
In this respect, the overall goal is not economic growth but a steady state, with economic growth being a consequence of reconfiguring our systems towards resilience and wealth sufficiency with concomitant commitments towards population stabilisation and biodiversity net gain.
This posting makes more sense than either Mr. Bull’s original article in the Guardian or Mr. Franklin’s response to it above.
Yes but a rather long winded jargonesque recommendation for manufacturing necessary stuff at home wasn’t it
As, John points out below the Black Death arrived from China many years ago, had it learnt how to fly, or even drive?
The current virus would have arrived here anyway, so do not worry about flying.
Whilst more manufacturing capacity for PPE would be desirable for the UK, to have the stock, or spare capacity to deal with such an increase in demand would be massively expensive and wasteful.
What is the increase over normal demand, 20 or 200 times? To keep anything like that stock – with items having a shelf life – would mean throwing away vast amounts of PPE (often using plastic) each year.
The fuss over single use plastic is bad enough, image the fuss over no use plastic !
The Black Death took a few years to spread around the world, COVID-19 took a few weeks according to the reports emerging of early cases in Europe.
Medical science has advanced somewhat since 1350, we are no longer powerless against disease. Slowing the spread of a disease does have a benefit because it provides time to prepare, to establish infection control regimes to limit the spread within a country, to prepare healthcare facilities with materials, drugs, equipment ready to treat patients.
Given enough time it allows the identification of effective treatment regimes for those suffering from the disease, to trial potential drugs, and vaccines.
On PPE the solution is already emerging – reuseable PPE which can be decontaminated and re-used repeatedly.
Holding sufficient PPE to deal with a pandemic would as you say be hugely wasteful but having sufficient capacity to make enough for each days use wouldn’t be beyond reason. That capacity could be used in normal times to manufacture clothing or any other textiles but with the option to switch production when necessary. In the past governments subsidised some industries for strategic reasons but our worship of market forces makes such an idea heretical. Our rag trade was destroyed by competition from overseas but relatively small amounts of support might have kept those machines and their operators employed. Time to look at some old ideas again.
‘It’s just a shame we didn’t put the supermarket bosses in charge of PPE and testing kits.’
Yes, our experience and that of Germany have demonstrated two key things: that the private sector is much more able to solve problems quickly and efficiently, but also that our public sector has such a hatred of anything private that it will refuse any offer of help, and essentially do the opposite of anything the private sector proposes. Hopefully, this automatic assumption that anyone who turns a profit is the devil incarnate will be the biggest casualty of this crisis.
‘The virus has only caused so much harm because the infrastructure of the globalised economy massively accelerated its spread across the world. ‘
No. It has only cause so much harm because of the incompetence of Governments. The virus has caused no more harm than seasonal ‘flu.
The Black Death originating in China wiped out nearly 50% of the population of Europe, because that global infrastructure has been in place for a very a long time which seems not to be understood widely. It is not a matter of how long a disease takes to get to a place, it is what it does when it gets there.
We’ve built a hyper-connected transport system but without the fast-acting protective systems needed to contain the spread of infectious diseases.
An interesting comparison is to another system, the power grid. Power grids get something equivalent to diseases, they get electrical faults and like a disease the effects of a fault radiate outward through the network only much faster, in seconds and if not rapidly removed faults can interrupt power supplies, blacking out towns, cities, countries, even continents.
Yet faults on power grids are common but large-scale black-out events are exceptionally rare because power grids have fast-acting, multi-layered protective systems to identify and contain faults to stop their effects spreading through-out those connected systems. They have automatic trips, circuit breakers, continually monitoring for faults ready to trip, to localise and isolate any faults because protecting the wider system and keeping it up and running is key.
I would suggest that hyper-connected systems can work reliably but they need fast-acting protective measures to contain systemic threats, circuit-breakers, there in place ready to trip and break that connectivity when the situation demands, in order to protect the wider system.
Coming out of this I think there’s a strong argument that our public health systems need a set of transport and disease control ‘circuit breakers’ defined, legislated and in place and with clear frameworks ready to be tripped to prevent or at least slow the spread of any future emergent diseases.
Please tell California to model its power grid on the one you describe. We get blackouts every time the wind blows over 40 mph between June and November.
“There’s a strong argument that we’re in the midst of a “great stagnation” ” that we’re no longer making technological breakthroughs like we did in the 19th and 20th centuries”
Seriously?
Interesting item. The successes seemed to have been the doctors and nurses on the frontline, supermarkets putting food on the table, the military responding in any task given many other groups who kept the lights on, water in the taps and sewage flowing etc.. The poor performance appears to be PHE, Sage, civil service, quangos and government. The situation that caused this disaster to happen is also due to our political elite and quangos and civil service and the drive for hyper connectivity and a failure to design and maintain robust capabilities for our economy.